Whistleblower claim does not die with the whistleblower

By James A. Beavers, CPA, CGMA, J.D., LL.M.

An individual's whistleblower claims survive the death of the individual, and the estate of a permanently nonfunctional individual can be substituted for that individual in a Tax Court case where the court is asked to review the IRS's denial of the deceased individual's whistleblower claim.

Background

Joseph A. Insinga submitted claims to the IRS Whistleblower Office (WBO) for whistleblower awards related to eight target taxpayers and 94 transactions. The WBO denied the claims, and, in response, Insinga filed a petition (under Sec. 7623(b)(4)) in the Tax Court requesting the court review the IRS's adverse determination regarding his claims for awards. After substantial pretrial wrangling, Insinga and the IRS stipulated that only his claims regarding two of the entities remained at issue, and Insinga filed an amended petition that asserted only those two claims.

With his Tax Court case still pending, Insinga died on March 22, 2021. Insinga's estate filed a motion for substitution in June 2021, asserting the estate should be substituted as petitioner for Insinga in the case (and that the case caption be accordingly changed to reflect the substitution).

The Tax Court's decision

The Tax Court held that its jurisdiction over a petition filed pursuant to Sec. 7623(b)(4) is not extinguished by the death of the whistleblower. Thus, Insinga's claim survived his death, and his estate had standing to be substituted for Insinga as the petitioner in his Tax Court case.

Survival of the claim: When a federal statute does not specifically address survival rights, federal common law provides the general rule that rights of action under federal statutes survive a plaintiff's death if the statute is remedial, not penal. Generally, a three-factor test is used to ascertain whether a statute is remedial or penal, examining: (1) whether the purpose of the statute was to redress individual wrongs or more general wrongs to the public; (2) whether recovery under the statute runs to the harmed individual or to the public; and (3) whether the recovery authorized by the statute is wholly disproportionate to the harm suffered.

The Tax Court noted that no court has decided whether Sec. 7623(b) has a remedial or penal purpose. However, it found that claims under the False Claims Act (FCA) shed light on the treatment because qui tam actions are analogous to whistleblower claims.

In NEC Corp., 11 F.3d 136 (11th Cir. 1993), the court held that a decedent-plaintiff's claim under the FCA was remedial and therefore survived his death. The court determined that the three relevant factors favored a finding that the statute was remedial: (1) The purpose of the qui tam remedy under the FCA was to redress individual wrongs of the relator who (the court held) may suffer "substantial harm" by bringing the qui tam action; (2) qui tam provisions are intended to remedy, at least in material part, the harm suffered by the individual relator rather than the public at large; and (3) the fact that a relator's recovery depends upon and is proportional to the extent to which the person substantially contributed to the prosecution of the action weighs in favor of a remedial purpose. With respect to the FCA, courts have widely arrived at the conclusion that a claim brought by an FCA relator that is pending at his death survives and may therefore be pursued by his estate. See Satory Global, Inc., 946 F. Supp. 2d 69 (D.D.C. 2013).

Applying the three-factor test to Sec. 7623(b), the Tax Court found that (1) the purpose of its award provisions is to redress individual wrongs of the whistleblower in bringing his or her claim (such as retaliation by an employer or professional ostracism) by compensating him or her for the harm he or she may incur by bringing the claim; (2) it is intended to provide a remedy to the whistleblower for bringing the claim by providing mandatory compensation for claims where the collected proceeds meet certain statutory thresholds; and (3) the recovery due to the whistleblower under Sec. 7623(b)(1) is proportional to the harm the whistleblower incurs in bringing his or her claim because it depends upon the extent to which the whistleblower substantially contributed to the action. Thus, the Tax Court found that three factors weigh in favor of the conclusions that Sec. 7623(b) has a remedial purpose and that a whistleblower's Tax Court petition survives his or her death. This court further noted that its conclusion is bolstered by the holding in Figueroa v. Secretary of Health & Human Servs., 715 F.3d 1314 (Fed. Cir. 2013), that the starting point at federal common law is a presumption that a remedial federal cause of action survives when a statute does not contain an explicit statement to the contrary.

The Tax Court also found support for its conclusion in Regs. Sec. 301.7623-4, which states:

If a whistleblower dies before or during the whistleblower administrative proceeding, the Whistleblower Office may substitute an executor, administrator, or other legal representative on behalf of the deceased whistleblower for purposes of conducting the whistleblower administrative proceeding.

While this regulation became effective for claims submitted or open after Aug. 12, 2014, which was after the filing date of Insinga's Tax Court petition, according to the IRS, the WBO would be bound by the regulation in further proceedings if the Tax Court remanded the case. Moreover, although the court was not bound by the regulation and it was not applicable in Insinga's case, the court found that it lent persuasive support to its determination that Insinga's petition survived his death.

Standing: Tax Court Rule 63(a) provides: "If a petitioner dies, the Court, on motion of a party or the decedent's successor or representative or on its own initiative, may order substitution of the proper parties." While the IRS did not dispute that Insinga's estate was the proper party to substitute for him, the Tax Court determined, based on its analysis of the survival of the claim, the estate had standing to pursue Insinga's Sec. 7623(b) claim.

Reflections

As many courts have observed, it is often difficult to determine whether a statute is remedial or penal, and with many statutes reasonable minds can differ as to the statute's correct characterization. However, Sec. 7623(b) would seem clearly remedial. The statute rewards whistleblowers for their injuries (although, in actuality, whistleblowers are paid for bringing in valuable information to the IRS, as there is no relationship between the size of the award and any alleged injuries suffered by the whistleblower) and the statute itself does not in any way penalize the wrongdoing taxpayer. Any penalty the taxpayer suffers is a result of the application of other statutes by the IRS.

Insinga, 157 T.C. No. 8 (2021)

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